High Court Ruling on Capital Maintenance

Case: Abbar and another v Saudi Economic & Development Company (Sedco) Real Estate Ltd and others

Background

In Company law a company may not return capital to its shareholders unless it is by one of the ways expressly permitted by statute, i.e. a reduction of capital, the redemption or purchase of shares in accordance with relevant statutory provisions or a distribution in a winding up in accordance with the rule of Trevor v Whitworth.

Facts

In this case the shareholder brought a claim to include the breach of an investment agreement under which he had subscribed for shares in a company.  The shareholder alleged that the company had breached an obligation to sell a development site within a certain period and then distribute the net proceeds to its investors, who had the right to receive their original investment sum together with any profit.

An award of damages to a shareholder for a breach by a company is not permissible where the contract could only be performed in a manner that offended the capital maintenance principle.

The Companies Act 2006 in dealing with the redemption and purchase of shares by a company excludes damages as a remedy for breach.  Such a redemption or purchase may only be enforced through the statutory mechanism and in this case the contract could only be enforced through orders which ensured the return of capital would be effected through either a reduction of capital, the redemption or purchase of shares or in a winding-up.

Decision

Whilst the court was prepared to assume that the rule applied only in cases where the transaction or contract in issue was one that could only be performed in a manner that offended the capital maintenance principle, the alleged obligation in this particular case was whether the site was sold at a profit or loss, ultimately resulting in the return of capital.  Any award of damages to a shareholder for a failure to repay capital to him was equally a return of capital.

The court held, obiter, that no such contractual obligation was given and the claim for breach failed.  The court considered that had there been an obligation and breach, an award of damages would have involved an unlawful return of capital.